CHAPTER 4

Environmental
Scanning and
Industry Analysis
Continuation of last sessions lecture

THOMAS L. WHEELEN

J. DAVID HUNGER

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Learning Objectives

Learning Objectives
After reading this chapter, you should be able to:

Apply the resource view of the firm to determine core and

distinctive competencies.
Use the VRIO framework and the value chain to assess an
organizations competitive advantage and how it can be sustained.
Understand a companys business model and how it could be
imitated.
Assess a companys corporate culture and how it might affect a
proposed strategy.
Scan functional resources to determine their fit with a firms
strategy.
Construct an IFAS Table that summarizes internal factors.
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Strategic Management Basic Model

Resource-Based Approach to Organizational Analysis

Internal strategic factors

Critical strengths and weaknesses that are likely to
determine if the firm will be able to take advantage of
opportunities while avoiding threats

Resources
Capabilities
Competency
Core competency
Distinctive competency
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Resource-Based Approach to Organizational Analysis

Resources are an organizations assets and thus the basic

building blocks of organization (tangible assets, human assets &

intangible assets)

Capabilities refer to a corporations ability to exploit it

resources

Competency is a cross-functional integration and coordination

of capabilities

Core competency is a collection of competencies that crosses

divisional boundaries, is widespread within the corporation, and is
something that the corporation can do exceedingly well

Distinctive competency when core competencies are

superior to those of the competition

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Core and Distinctive Competencies

VRIO Framework
Value :

Does it provide customer value and competitive advantage ?

Rareness :
Imitability :

Do no other competitors possess it?

Is it costly for others to imitate?

Organization :

Is the firm organized to exploit the resource?

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Resource-Based Approach to Organizational Analysis

5-Step Approach Strategy Analysis

1.
2.
3.
4.
5.

Identify and classify resources

Combine strengths into capabilities
Appraise profit potential of capabilities
Select strategy that best exploits
Identify resource gaps invest in weaknesses

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Sustainability of Advantage

Imitability
Rate at which a firms underlying resources and
capabilities can be duplicated by others

Durability
Rate at which a firms underlying resources and
capabilities depreciate or become obsolete
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Sustainability of Advantage

Core Competency can be imitated

Transparency is the speed with which other firms can understand the
relationship of resources and capabilities supporting a successful firms
strategy Gillette has always supported its dominance in the marketing of
razors with excellent R&D. A competitor could never understand how the
Sensor or Mach 3 razor was produced simply by taking one apart. Gillettes
razor design was very difficult to copy, partially because the manufacturing
equipment needed to produce it was so expensive and complicated.

Transferability is the ability of competitors to gather the resources

and capabilities necessary to support a competitive challenge it may
be very difficult for a wine maker to duplicate a French winerys key resources
of land and climate, especially if the imitator is located in Iowa.

Replicability is the ability of competitors to use duplicated resources

and capabilities to imitate the other firms success even though many
companies have tried to imitate Procter & Gambles success with brand
management by hiring brand managers away from P&G, they have often failed
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to duplicate P&Gs success.

Continuum of Sustainability

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Business Models

BUSINESS MODEL
Companys method for making money in the
current business environment
A business model is usually composed of five elements:
Who it serves
What it provides
How it makes money
How it differentiates and sustains competitive advantage
How it provides its product/service
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Business Models

Types of Business Models

Customer Solutions Model: IBM uses this model to make money not by
selling IBM products, but by selling its expertise to improve its customers
operations. This is a consulting model.
Profit Pyramid Model : GM offers a full line of automobiles in order to
close out any niches where a competitor might find a position. The key is
to get customers to buy in at the low-priced, low-margin entry point
(Saturns basic sedans) and move them up to high-priced, high-margin
products (SUVs and pickup trucks) where the company makes its money.
Multi-Component System/Installed Base Model l: Gillette invented this
classic model to sell razors at break-even pricing in order to make money
on higher-margin razor blades. HP does the same with printers and printer
cartridges. The product is thus a system, not just one product, with one
component providing most of the profits.
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Business Models

Types of Business Models

Advertising Model : Similar to the multi-component system/installed base
model, this model offers its basic product free in order to make money on
advertising. Originating in the newspaper industry, this model is used
heavily in commercial radio and television. Internet-based firms, such as
Google, offer free services to users in order to expose them to the
advertising that pays the bills.
Switchboard Model : In this model a firm acts as an intermediary to
connect multiple sellers to multiple buyers. Financial planners juggle a
wide range of products for sale to multiple customers with different needs.
This model has been successfully used by eBay and Amazon.com.
Time Model: Product R&D and speed are the keys to success in the time
model. Being the first to market with a new innovation allows a pioneer like
Sony to earn high margins. Once others enter the market with process
R&D and lower margins, its time to move on.
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Business Models

Types of Business Models

Efficiency Model: In this model a company waits until a product
becomes standardized and then enters the market with a low-priced, lowmargin product that appeals to the mass market. This model is used by
Wal-Mart, Dell, and Southwest Airlines.
Blockbuster Model: In some industries, such as pharmaceuticals and
motion picture studios, profitability is driven by a few key products. The
focus is on high investment in a few products with high potential
payoffsespecially if they can be protected by patents.
Profit Multiplier Model: The idea of this model is to develop a concept
that may or may not make money on its own but, through synergy, can
spin off many profitable products. Walt Disney invented this concept by
using cartoon characters to develop high-margin theme parks,
merchandise, and licensing opportunities.
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Business Models

Types of Business Models

Entrepreneurial Model: In this model, a company offers specialized
products/services to market niches that are too small to be worthwhile to
large competitors but have the potential to grow quickly. Small, local brew
pubs have been very successful in a mature industry dominated by
Anheuser-Busch. This model has often been used by small high-tech
firms that develop innovative prototypes in order to sell off the companies
(without ever selling a product) to Microsoft or DuPont.
De Facto Standard Model: In this model, a company offers products free
or at a very low price in order to saturate the market and become the
industry standard. Once users are locked in, the company offers highermargin products using this standard. For example, Microsoft packaged
Internet Explorer free with its Windows software in order to take market
share from Netscapes Web browser.
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Value-Chain Analysis

Linked set of value-creating activities beginning

with basic raw material and ending with
distributors getting final goods into hands of
customers
Typical Value Chain for a
Manufactured Product

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Corporations Value Chain

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Scanning Functional Resources & Capabilities

Basic Organizational Structures

Simple structure
Functional structure
Divisional structure
Strategic Business Units (SBUs)
Conglomerate structure

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Basic Organizational Structures

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Corporate Culture

Collection of beliefs, expectations, and values

learned and shared by a corporations members and
transmitted from one generation of employees to
another

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Strategic Marketing Issues

Market Position & Segmentation

Marketing Mix
Product Life Cycle
Brand & Corporate Reputation

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Marketing Mix Variables

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Product Life Cycle

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Strategic Financial Issues

Financial leverage

Capital budgeting

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Strategic Research & Development Issues

R&D Intensity, Technological Competence

and Technology Transfer
R&D Mix
Impact of Technological Discontinuity on
Strategy

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Technological Discontinuity

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Strategic Human Resource Management Issues

Human Resources Management

Increasing Use of Teams
Union Relations and Temporary/Part -Time Workers
Quality of Work Life and Human diversity

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Internal Factor Analysis Summary Table

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1. What is the relevance of the resource-based view of the firm to

strategic management in a global environment?
2. How can value-chain analysis help identify a companys
strengths and weaknesses?
3. In what ways can a corporations structure and culture be
internal strengths or weaknesses?
4. What are the pros and cons of managements using the
experience curve to determine strategy?
5. How might a firms management decide whether it should
continue to invest in current known technology or in new, but
untested technology? What factors might encourage or
discourage such a shift?
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